Originally published in the Financial Times on September 16, 2016

It has been eight years since Lehman Brothers went bankrupt and still it defines the calendar. For anyone in the financial world, time is divided into Before Lehman, and After Lehman.

And yet, even after eight years, the crisis’s lessons are controversial. Anger is as intense as ever. And when it comes to making the financial system proof against another Lehman, every day seems to bring further proof that we do not know what we thought we knew.

This week, Senator Elizabeth Warren, said the next president should reopen investigations into senior bankers who avoided prosecution, and that the FBI should release its notes on its investigations. The failure to punish any senior bankers over the scandal angers the populist left and right, the world over.

But while most people are disgusted that bankers got away scot-free, the bankers themselves — or at least their shareholders — feel that they have been punished. Over the past 10 years, banks globally have underperformed the rest of the market by about 50 per cent, according to MSCI. Their profits have flatlined for years and remain below their level before the crisis. Trading revenues are down, and once-bustling trading rooms are almost deserted.

Post-crisis financial reforms, forcing big banks to hold far more capital as a cushion, and barring them from risking depositors’s capital by trading on their own account, have combined with low interest rates — which make it harder to make a profit — to make banking duller and less profitable, albeit less risky.

Such an outcome seemed inevitable in 2008. But many believe post-crisis re-regulation has been inadequate. In a divisive US presidential campaign, one commitment that appears in both parties’ platforms is to bring back Glass-Steagall, the Depression-era law that barred commercial banks from investment banking or insurance.

Glass-Steagall was repealed in 1999, with bipartisan support. It seemed obsolete and unnecessary. None of the institutions to fail in the crisis, including Lehman, mixed commercial and investment banking. But the belief that we need to do more remains intense.

The banks to survive 2008 in best shape have been built up as role models and then torn down. After the likes of Goldman Sachs, JPMorgan, and HSBC, it is now the turn of Wells Fargo, which became the world’s biggest bank by market value post-crisis, thanks to a focus on commercial banking and a fierce sales-driven culture. For 20 years, Wells and its predecessors have referred to “stores” not “branches”.

It was a simple and effective business model, until it emerged that the hot sales culture had encouraged widespread fraud and misrepresentation. Now, Wells is firing staff, its share price has tumbled, and it is no longer the world’s most valuable bank.

Another belief that may not be true is that central banks have grown too powerful. By pumping out money and expanding their balance sheets, they are ever more significant economic actors.

But post-crisis reforms may have robbed the Federal Reserve of precisely the powers it will need to avert the next Lehman. That, according to a fascinating new book, Connectedness and Contagion, by Hal Scott of Harvard Law School, is because of a final truth we thought we knew — the crisis of 2008 was not what we thought it was.

Mr Scott says correctly that the popular explanation for the crisis was “connectedness” — the domino effect when the failure of one institution leads to failures of others that lent to it or relied on it for funding. Attempts to make banks hold more capital and indulge in fewer risks, and to regulate those that are “systemically important” revolve around attacking connectedness.

But Mr Scott shows that none of the banks that fell or were rescued were important enough to another big institution to cause its failure. Instead, Lehman nearly brought down the financial system through “contagion”, or the fear of connectedness. That led short-term funding markets on which banks relied for funding and which paid company payrolls, to dry up as trust evaporated. Contagion is about basic psychology.

Thanks to anger over the bailouts banks received, the Federal Reserve has since lost key powers to deal with contagion which centre on its role as “lender of last resort”, propping up markets as they dried up, and bailing out institutions whose parlous state was scaring the market. Its freedom to act this way again has been greatly circumscribed.

Many believe the 2008 bailouts were a waste of taxpayers’ money. But once the panic subsided, they were generally repaid. So if Mr Scott is right that we have to fear our own fear more than anything else, re-regulation has only reduced any dynamism in the financial sector, while making it more vulnerable to contagion than it was before.

The events of eight years ago were a profound shock. A stunned reaction was unavoidable. But we are still stunned, and groping for the truth.